This Week in Food and Restaurants
by Aristotle Munarriz (MF Edible)

Alexandria, VA. (February 7, 1997) -- Now that the country can shift their attention from O.J.'s future to O.J. futures, we can dig back into the weekly world of food without risking interrupting the State of the Union Address. It has been a busy week by most accounts as earnings keep trickling in. The abysmal showing by Brinker International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EAT)") else Response.Write("(NYSE: EAT)") end if %> seems to be an isolated case as more eatery stocks are coming in with surprisingly good earnings. Last week Edible Eight's Garden Fresh <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LTUS)") else Response.Write("(NASDAQ: LTUS)") end if %> reported estimates that were a penny better than estimates. Then this week both Rock Bottom Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BREW)") else Response.Write("(NASDAQ: BREW)") end if %> and Rainforest Cafe <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RAIN)") else Response.Write("(NASDAQ: RAIN)") end if %> also bested the consensus. Can it be that investor sentiment towards the eatery sector has bottomed? Even those that are in line, like yesterday's pre-announcement from Dave & Buster's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DANB)") else Response.Write("(NASDAQ: DANB)") end if %> of meeting the analyst target of $.27 a share is garnished with stepped up expansion as the company now plans to open four units next year. So, while everyone else is surfing the Net for smut what appears to be obscene is the valuation some of these beaten up restaurants are being tagged with.

THE EDIBLE EIGHT

Yesterday was E-Day for Rainforest Cafe and it was another V in the Earnings column. They eclipsed estimates by more than two cents, almost tripling last year's $.06 showing for the quarter with a $.15 performance this time around. For the year the company earned $.41 a share with estimates expecting earnings to double this year. Are 1997 upward revisions in the offing? Analysts are looking for $.14 this current quarter, so is it time to jack that up to match last quarter's outperformance or the one before that? Since the company started the quarter with six Cafes, rather than the four that were open three months earlier, will margins improve? Can Woodfield get worse than the 15% decline for the fourth quarter?

The Conference Call was more of a Confidence Call. While the problems at Woodfield are as real as any natural "honeymoon" period with a themed eatery, and Taj Mahal's 1998 opening is still running into glitches, Rainforest Cafe has become a company that can now not only swallow a weak unit any given quarter, but can actually thrive in spite of it. The six existing units will be a tight family for now since the next opening won't happen for another four months when South Coast Plaza opens in Los Angeles. Shortly after that the London licensed unit (where Rainforest Cafe will have a 20% equity interest but also receive about 7% of total sales as a royalty) will open in the tourist heavy Trocardero district. A whirlwind of second half openings will find ten new units by the end of the year and a solid base of 13 domestic and three international units to bring on the New Year. Here are some excerpts from the Rainforest Cafe message board, covering the Call. . .

Themed restaurants tend to report same-store-sales earnings after 18 months (due to the "honeymoon" period over the first few months of a new eatertainment place) but given the Woodfield whispers they went ahead and noted the drop there. While the company is not expecting much of a reversal at Woodfield this current quarter, it is good to note that the proprietary Rainforest Animals were not introduced at Woodfield until "late 4th quarter". That is significant given the fact that while restaurant sales were off 12%, the retail side was down a staggering 25%. Still, the company estimates that Woodfield Mall itself had a 10% drop-off in mall traffic given to their Grand Reopening promotion they ran in 1995's 4th quarter. The fact that Woodfield has 430 seats, making the drop that much more obvious, is a reason why the company is stressing smaller, 350-375 units beyond the "icon" ones like Disney and MGM. One amusing side note, while most will be quick to note that Woodfield is a failure it is still on track for a 55% annual cash on cash return. So, even as a letdown that money is still doing 10 times better what it would be doing in their cash hoard, which, by the way, remains substantial at $162 million.

Okay, on to the positive. Disney had $7.8 million in revenues with 19% operating margins. That was well above their 16% target (hey, this unit was just 5 months old at the end of the quarter). That was the best news to me at least. Mall of America had 18% margins in 1994 (according to O'Dowd), 20% in 1995 and now 22.2% last year. So this is a great start for a unit that has become the cornerstone.

Operating margins before pre-opening expenses for the 4th quarter were a nice 19.7%. Okay, no new units for the first quarter, but there will be 10 next year: seven domestic (South Coast Plaza in the 2nd, Palisades, The Source and Chicago in the 3rd and MGM, Dallas and Phoenix in the 4th) and three international (London in the Trocadero district in the 2nd, Cancun, on the beach and next to All Star Cafe in the 3rd, and the first Canadian unit in the fourth, probably in Toronto).

Next week they meet with Eurodisney. As we know, they have not been lukewarm to opening in the Paris theme park but now a large French restaurant operator is coming into the picture to possibly license the unit. They are discussing with various international operators for similar licensing deals. They are talking to three different Asian companies (the closest will put 5 units in Hong Kong, Singapore, Jakarta, Manilla and Taipei starting in the 1st quarter of 1998 with a new unit every 8 months) as well as a Northern Asia (Japan, etc.) and Southern Asia (Australia, etc.). There is also an interested party in Spain. None of these have been inked, even though the main Asia deal seems to be close (I mean, if they have already targeted the first five sites and even a commencement date. . .)

Yes, no new units even though he did mention they are talking to potential landlords about 1998 sites in San Francisco, Manhattan, Houston, Philadelphia, San Antonio as well as new units in Dallas, Miami, Memphis, and Nashville.

The $20.2 million in operating revenue broke down to 77% restaurant and 23% retail. The 29% retail at Disney is obviously pushing that figure higher.

Food costs were just 24%, an all-time low for them. This was of great comfort after Brinker's woes, as poultry prices were favorable and their contract purchasing (you did know a growing company would get these efficiencies).

The training center opened in Orlando and will be busy as 180 managers will train there this year. As a matter of fact, the key people for the first London unit have been there for three weeks now.

Retail SKU's are shrinking. SKU's being the actual number of items they carry. They have gone from 5000 over the summer to 4000 presently and should head a little lower as they carry more proprietary items than simply a ton of unrelated merchandise. This is not to say that new items will not be added. In the 2nd quarter they will broaden their price range with new ceramic and food products, and a lot more $10 range impulse items. The goal, obviously, is to increase the average $18 per person tab.

There were no shares repurchased. The company plans the measure only if the market overreacts.

Oh, and the $.41 a share is a zinger (hey, a trailing P/E of a little more than 50 now) but it's more like $.38 a share given the extra $.03 a share from the Mexican licensing deal. More of that to come since they will pick up another $250,000 this quarter if the Canadian deal is officially signed in the next month or two. The new international deals are looking for similar 6% restaurant, 10% retail royalties but with "significant" up-front fees.

I mentioned the $162 million in cash but didn't note that capital expenditures were $39.2 million last year and Mark Robinow mentioned that they should be in the same range this year. That would make for some really savvy money management given the costly Downtown Chicago opening, but I like to hear it from the company.

Zoos? The company had considered some zoo locations but found that the foot traffic was not to their liking. When you get 2-3 million annual visitors at a large metropolitan zoo or 21 million annual visitors at Sawgrass, where would you build?

G&A? Should be at 6% of sub-6% this year.

The average yield on their cash portfolio was 5.5%.

65% of the Mall of America diners were locals.

The revenues, per unit: MOA ($2.7 million), Woodfield ($3.2), Gurnee ($2), Disney ($7.8), Tyson's ($3.0), Sawgrass ($1.5).

Fini,

Edible

1997 Returns To Date: (as of Wednesday)
The Edible Eight      -2.6%
NASDAQ                +4.4%
S&P 500               +5.1%
Fidelity Sel: Food    +4.2%
IBD: Restaurants      -0.7%

Until next week, Digest Foolishly,

MF Edible

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